No vacancy: S.F. sublease space falls to 13-year low

Reporter- San Francisco Business Times

If you are a downtown San Francisco office tenant waiting for cheap sublease to grab, you are going to have to wait a bit longer.

The amount of sublease space on the market— a metric that brokers use as a barometer of impending market weakness — is at its lowest point since 2000, according to research by CBRE.

Currently San Francisco has 1.1 million square feet of sublease space available. That is 60 percent decline from the 2.7 million square feet of unwanted space on the block after the collapse of the financial markets in 2009. And it’s 80 percent down from the 5.3 million square feet of dark and unwanted space left behind in the detritus of the dot-com train wreck in 2002.

Not surprisingly, rents for sublease space have shot up as the crunch has come. Rents for subleases have more than doubled from a low of just above $20 a square foot in 2010 to about $42 a square foot today.

And as the cost of construction rises, tenants will be even quicker to grab any decent built-out sublease space that hits the market, even if it’s short term, according to Colin Yasukochi, research director for CBRE.

Recent sublease deals include SunRun’s deal at 595 Market St., which was a sublease from Visa. Salesforce is expected to put unwanted space on the sublease market over the next few years as it consolidates at 50 Fremont, 350 Mission, and Rincon Center. Salesforce will be looking for subtenants for space at 123 Mission St., 1 California St., and 1 Market Plaza.

In a recent report the tenant rep shop Studley pointed out that tech companies are taking more space than they need, while efficiencies and the trendy collaborative workplace design is allowing the rest of the market to shrink square footage. Tech tenants are “making pre-emptive strikes and warehousing block of space in anticipation of future growth.” In contrast, legal, financial and other traditional space users are “taking a more analytic and cautious approach, having largely too much space already.”

Eventually, as anyone who has observed the boom-and-bust cycles of San Francisco’s past can understand, the market will crash and sublease space will become abundant. Although in this sizzling market it may take another few years. That is not going to be much solace if you are looking for a new office in 2014.

“It is critical that tenants of all sectors and sizes understand the pace of the market and rationally assess alternatives in both the short- and long-term,” said Steve Barker, Studley EVP and branch manager of the firm’s San Francisco office. “For example, large tenants with leases expiring between 2015 and 2017 have the time to assess whether or not the market’s growth will continue unabated. One potential opportunity for these users is the next wave of top-tier product which is set to deliver during the same timeframe. The first tenants to make sizeable commitments in the new projects will likely capture the greatest space efficiencies and generous concessions.”

Source: Business Journal